An excuse has been defined as “the skin of a reason stuffed with a lie”. There are two Boardmember sentiments we hear most frequently expressed: “We can’t afford the Reserve Funding Plan” and “We’ll worry about that next year”. But no matter how many times a Boardmember may repeat these sentences, it doesn’t mean they’re true and it doesn’t mean they’re wise. After we look beneath the skin of these two reasons, it may surprise you how differently you feel about these excuses!
The Internal Revenue Service (“IRS”) excludes from an association’s taxable income those amounts which are properly kept and used for capital contributions. In several significant Revenue Rulings, the IRS considered special assessments for major repairs and replacements to be capital contributions in addition to capital contributions to reserve funds from annual assessments.
One of the primary business duties of community associations is maintaining and preserving property values of homes and the common property. To do this properly, associations must develop funding plans for future repair or replacement of major common area components, such as roofs, boilers, elevators, swimming pools, balconies, asphalt surfaces and decks.
An association has several funding options, including periodic assessments over the life of assets, special assessments at the time of replacement, borrowing funds when needed, a combination of the above or the most common method – and in many states the only lawful alternative: setting aside funds in a special category commonly called reserve funds.
Board members and Managers often get themselves into a situation where they need to “sell” the value of regular Reserve contributions to their homeowners. It’s often a simple matter of fighting for budget dollars… Reserve contributions don’t keep the lights on, they don’t keep the Association properly insured, and they don’t pay the Management...